Thanks to another short-selling blogger, Deer Consumer Products (DEER) is taking a huge hit today — I last wrote that I had sold my shares but still still thought it was reasonably valued back in January when I was issuing updated opinions on many of the stocks I’ve covered in the past. Since then DEER has remained on many of the lists of cheapest, highest margin Chinese stocks — and lately Alfred Little, who distributed his research on SeekingAlpha and elsewhere, has done in-depth short research on the stock that he says indicates that the company is cooking the books and doing something shifty with land purchases that are on the books at above-market prices and unverifiable by local government offices.
I have no idea whether or not there’s anything dirty at DEER — Little’s conviction in part is due to his assessment that they couldn’t be generating the domestic profit margins they claim because their competition is better and has stronger exposure in the key chain stores and does more advertising, so he thinks they must be lying based on his channel checks. Additionally, he says that he sent a team to the local land offices to review their purchase of land for future expansion and couldn’t find record of the purchase, or justification for why the purchase price was well above the market price, and late last week he noted that the company management appears to be running a competing company on the side in some way.
I don’t know if he will turn out to be correct about any of that, but if there is something fraudulent in DEER’s books or behavior it’s been missed by many of us — perhaps Chinese blenders were just too boring and “real” for investment pundits, myself included, to assume fraud because they report high profit margins. Still, the stock is down about 15% today based on this extensively described short-side research — which will tell you just how jumpy the market is about Chinese stocks, and why, although I continue to buy Chinese stocks on occasion myself, I’m growing more and more reluctant to write about them for you. That’s part of the reason why I decided to write about an Australian stock instead of O2Micro as the “Idea of the Month” for March, even though I personally bought the latter last week.
As with ...